Financial regulators should change rules that allow investors to account for government bonds as risk-free assets, the BdB association of German banks said.
“Banks have been an important pillar of state financing because states wanted it,” BdB President Andreas Schmitz told reporters in Frankfurt today. “Zero-weighting, a conscious and targeted piece of regulation from politicians, has without a doubt created false incentives and should now be replaced step- by-step.”
European banks are writing down the value of their Greek sovereign bond holdings to reflect a slide in prices and help rescue the indebted country. Banks invested in government debt because of its perceived safety, not because the returns were lucrative, said Schmitz, whose Berlin-based organization represents more than 210 commercial banks.
“The last months show us that government bonds need to have capital set aside for them,” he said. “That should be for new debt, because anything else would take the problem we have today into waters that none of us want to imagine.”
The loss of risk-free status for sovereign debt will force banks to undertake a “fundamental rebalancing of portfolios,” and raises questions about which asset class will be considered a safe haven, source of liquidity and collateral for counterparties, Deutsche Bank AG (DBK) Chief Executive Officer Josef Ackermann said in a Nov. 18 speech in Frankfurt.
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